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Acquiring and Accelerating Growth of eCommerce businesses - Amazon Business Tips with Adam Epstein - Part 1
August 3, 2021
Acquiring and Accelerating Growth of eCommerce businesses - Amazon Business Tips with Adam Epstein - Part 1
Session Videos:

A. Part 1 with Adam Epstein

B. Part 2 with Adam Epstein

Things we mention in this session of Seller Round Table:

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Transcription in this episode:
[00:00:01] spk_0: Welcome to the seller roundtable e commerce coaching and business strategies with and er not and amy Wiis, mm Hey what's up everybody this is Andy are not [00:00:14] spk_1: with me [00:00:16] spk_0: And this is seller round table # 102. We have Adam Epstein here today, Adam, thank you so much for being with us. Thanks for having me. Very excited. So adam we always like to start out with getting to know our guests a little bit better if you could give us some background, go as deep as you want to in terms of your journey to where you are today, you know maybe where you grew up, maybe where you're born, school work hard knocks, you know, anything that you wanna, you wanna fill us in on Sure I was born and raised in Los Angeles and recently moved back a few years ago, my career has been in finance, through and through some kind of a boring guy that went through two years of investment banking and then went into two years of investing, went back to business school, that some private equity um and really got the entrepreneurial itch when I was at business school, um started talking to some classmates, thinking about ideas, ultimately went back into finance afterwards, but continued to have that the desire to try to start up. Um and as I was looking for new opportunities, um found our two co founders that boosted commerce through a headhunter um talk with them and really fell in love with the idea. Um in particular, as we think about this role, I am our head of M and A. Um there's not too many startups where you have the ability to grow in organically on in addition to the organic growth and kind of use my investing acumen within a startup, you know, spot. So I was super excited about the role the company was started about a year ago, I joined shortly thereafter. Um, and we've been rocking and rolling ever since. Awesome. So if you could, uh, you know, give people kind of a macro view on, um, you know, kind of the process like say there's a cellar, like, hey, I just hit seven figures, I want to sell my business, You know, what's that process look like in terms of approaching you guys? Yeah. So we see businesses from all different types of angles, all different types of places. There's obviously brokers out there in the space and brokers certainly have their, their place within the amazon ecosystem and what we'll see deals from them, but we also have people reaching out to us directly, um, and us doing some outbound research as well. Um, so really all three of those tools are different ways to get in contact with us. Um, we have emails acquisition at boosted dot com. You can go to our website boosted commerce dot com. There's some free form uh free file forms fill out in terms of some overview on your business. So we can get understanding from there will typically have a very short introduction call to make sure the business fits with us than probably one more deeper call to really dive in. As for some data requests pretty quickly after that, we will provide you with an indication of what we think your business, you know, the value of your business. Um make sense in both sides get to an agreement from there. It's a a 30 to 45 day ish period Of diving in a lot deeper on due diligence, making sure we really understand the business. So when we transition, there's no issues, no concerns and it kind of continues with the stability and growth that you have. Um part of that is legal documentation. And then after that 45 days you transfer the business to us, we transfer you the money. Um, there's a usually a short period where we kind of have a transition in terms of you, helping us continue to run the business to make sure we fully understand it and then you're sitting on the beach drinking a margarita while we're working for you and making you some more money. So, um, so in terms it sounds like you, uh, you know, as part of the deal, the original owner keeps some percentage of the business. Is that correct? They get some get to uh, retain some equity. Is that a discussion like how does that kind of work? Yeah. It's usually not equity. What we have is an earn out, right? So it's actually limits the downside is is the further seller doesn't actually have to put any more money in the business even if anything were to happen, but participates in the upside. So assuming we continue to grow the business, like I said, we're working for you guys for for a little bit, you being the seller um as you know, you'll continue to earn money as we earn money as well, interesting. So give me uh you know, going back to my example, so I come to you, I've got a million dollar, you know, seven figure amazon business, you know, Sam I'm, you know, netting 30% um you know when I come to you and say, hey, I wanna, you know, some of my business, I know the terms are gonna be different, so this is I'm going to preempt this with like, you know, don't expect this, you know, for every business guys, but just an overall example, you know, what would the equity payout kind of look like? You know, uh you know, is there, you know, what's the, what's the average multiple, you know, kind of things like that? Yeah, there's obviously a lot more than just margins and size. Right? They we have kind of a criteria we go through including what industry are you and what is the competitive landscape look like? Are you a leader in the category? Do you have a review mode? How long have you been there in terms of history associated with the business? You know, what does your product diversification or concentration look like? What is your mix of organic versus an inorganic growth and how much PBC are you spending? Um you know, just to name a few, there's a bunch of different aspects that go into it. So it's tough to give a an exact number. What we're typically seeing at the moment is multiples kind of in the 3 to mid-4 range for most businesses of that size, those take up a little bit and that's kind of a combination of cash up front. Um the urn out or component, which we just talked about then the third component is usually either a seller note where the seller provides, you know quote unquote debt to the business in order to continue to push forward or what we call stability payment. Where given some of the covid bunk, what we'll say is hey we want to give you credit for all of that growth but we also want to make sure that the growth maintains right. So if you can even just keep it flat, not even, we don't need to grow the business without stability, but just keep it flat. Um, we'll pay you for, you know, the size of the business with an extra X amount or x percent of the overall purchase price, awesome. So, um I assume that, you know, you probably get quite a few businesses coming through the door. You know, you probably, you know, take on some, don't take on others. When I'm curious though, without giving away any any clients info, which I know you would never do, what are maybe like three things that you may be in common that are that you see in businesses that are really strong and successful and maybe three that, you know, that you see a lot of, you know, maybe the three biggest mistakes or three biggest issues that you see from uh companies that, you know, are maybe not the best fit for you guys or just, you know, uh, not being super successful with amazon. Sure, it's all dependent. Right. I think every every buyer has something different that they look for. One thing that we are typically looking for. Excuse me, is [00:07:10] spk_1: a [00:07:12] spk_0: sorry about that. Heroes Hugh. So we're looking for one kind of for a couple um, that really drive the business, right? So when we look at our business model, we're looking to put together a portfolio of different businesses and at that size, if you have a hero's Q, it's a little bit easier for us to um, Grow to understand to operate right? If you have 100 skews doing $1 million, A little bit harder to understand how that works. Where if you have four skews and three of them are doing 900, about a million. And we can really understand those cues, we can understand where they are and and help. So our diversification typically comes across the portfolio where we're looking for a little bit more concentration at a deal that size, right? As we scale up and it becomes a little bit different. Um but that that's one thing that we're certainly looking for. Um the other thing, which I think is very important is rankings and reviews. Right? We like to call it a review mode. How do you stand out versus your competition? Um It's not anything that's that new or that crazy, but you know, if you're showing up in the first, the top five on certain keywords within your category, That 5th Avenue real estate is obviously worth a lot more than showing up on the second page where most people aren't scrolling there. So how do you get to the first page and how do you maintain that? Um you know, it's quite hard to get up there, but once you're up there, it's actually a lot easier to stay there given the, the, you know, cycle of, of amazon and you're kind of getting into that natural cycle. Um So those are two things that, you know, we're always looking at. The third one I think would be margins. Um as we kind of look at businesses, we typically like to see businesses of 20% plus margins. Obviously, again, depends on the category. If you go into supplements, let's get even higher. Um There's others that are kind of close to the teens make sense. But having, you know, if you're putting a dollar of revenue into amazon and amazon is taking a decent amounts because of their FDA fees and their marketplace vis etcetera, you want a little bit of wiggle room, so you're not doing all this work to get to get pennies on the dollar on on the end and then there's not a lot of room if something goes wrong on that margin. So 20% margins is kind of our our baseline for the right cos we'll look at changing that around. But those are three things in particular to think about from a very high level on the other side of things. There's two kind of things that really stand out. Um wanted stock outs right? I think stock outs, everybody has them in particular in times like 2020 when you're growing like a weed and you have no idea how to forecast because your forecast from last month has been quadrupled or quintupled. Um but having stock outs are pluses and minuses right? When we look at a business it's a plus in that, okay if that stock I wasn't there it actually lives with some additional room and upside on the minus and things do stuck out. Um Your ranking can go down pretty quickly because as I mentioned it's easy to stay in the top five. So you have people gunning for that top five and we'll take over your spot fairly fast. And then what we haven't boosted is called return to Glory S. O. P. In any ways that you have to kind of get back up to the top. And when that happens associated with that is also delistings right? And some delistings you can't help and that's the nature of amazon. Some of them you're gonna have some black activities where people will attack you. But having ways to minimize the listings and having S. O. P. S to get it back up as quickly as possible is huge because that you know the two ways you're not going to sell on amazon are our stock outs and delistings. So that's you know those are two things where we see him in the numbers. Obviously people want to buy growing businesses, people want to buy profit businesses and those are a couple things that overall or hurt fairly common. Yeah. Um I just from my own experience, you know I've been doing this since 2012 and you know I was one of those people who who scaled quickly and you know at one point we were up over 800 skews. Um and uh in retrospect one of the biggest mistakes we made was doing that right. If we would have just stayed really Tight in terms of you know maybe 10-20 skews um You know that would have been, you know I think a lot a lot easier to manage, right, the more Scuse you add, the more, the harder it is to manage. A lot of people don't realize that um so, you know, scaling quicks a great thing, but you know, unless you have, you know, stuff in place to be able to manage that kind of growth, um it's actually going to be a detriment in a lot of ways. Um, I'm curious to know, you know, how important is brand to you, so if somebody comes to you um and you know, they're, they're not really well known, but they're doing a ton of business on amazon, which is actually kind of common uh, these days, you know, do you care if they have a really strong brand outside of amazon or is it all, you know, you're just looking at the numbers for the most part? Uh, it's somewhere in between there and the truth. Right, So we, we are building up a portfolio businesses as I mentioned before, not every single product we're going to buy or brand we're going to buy, we're expecting to take off amazon. There are some products that are meant to be on amazon as well. There's other products where we're looking at it and there's brain potential beyond, right? Ultimately we want to be able to consumers right now. Obviously amazon is that spot to a 50% of e commerce business and e commerce business continues to grow at a tremendous pace, which is only accelerated by covid. Um but where else are consumers going? Right walmart is on its way up. So that's a super interesting opportunity. Shopify has grown in an enormous way over the last few years and it used to be woo commerce and now we're talking about shopping by, right, but having your own DTC site, but not every brands meant to have a DTC side, so it all kind of plays into the valuation, how we underwrite a business, what we're thinking about. Um there are certainly business on amazon, where if you have that review mode, you're up at number one. You know, most people on Amazon, I think a lot of stuff staff I saw was 80% are searching for a product, they're not searching for a brand name, so if you're searching for, so if you're going to search for, so if you're not searching does so from that perspective, amazon is not as important as either having a brand for DTC person. Um, but you still want, you know, something, I think that goes into review mode and what kind of reviews you have, and that in itself is almost a branding on amazon, right? Because there's not too many places outside a marketplace where All of your competitors are lined up and you have 27 straight pages of, so how are you going to stand out there? Right. Brand name is one that's not going to work. You need to be at the top of the rankings and you need to have reviews, so somebody's gonna come and say, okay, this has been validated by, by the amazon community of the amazon ecosystem. Um, and that's part of why amazon gets the fees they do for having the billions of eyeballs, they can see your problem. [00:14:01] spk_1: Right? So I'm really interested in the overall opportunity. What you, you know, your background is in finance, right? It's not necessarily in the e commerce, um, space as far as being a seller. And I'm curious what you think about the opportunity to quickly grow and sell a company in e commerce today. Do you think that despite the 3800 new sellers coming in every day, The, that, you know, the, what is it 85 or something percentage failure rate that Jeff Bezos admitted in front of Congress, you know, um, what do you think about the opportunity? Are you still seeing some massive, um, beautiful exits? Are you still seeing people really scale quickly? And do you think it's still just a really great opportunity? Or is it kind of equalised for other as compared to other income streams and opportunities? [00:15:03] spk_0: Yeah. From a, I can give you qualify that from both the buyer and a seller perspective. Right. So my background while investing, I've been doing consumer investing for a long time, traditionally more brick and mortar and have kind of moved towards e commerce. Um, what amazon has been able to do for mom and pop sellers is beyond incredible. Um, right, we talked to sellers all day long, We've probably talked over 1000 in the last year or seen 1000 businesses. Um, and you know, people have told us they learn from Youtube where they learn from, from blogs, just like this or channel channels. Um, and that's, that's incredible to me. That used to not be the case. And why is that able, why are you able to do that? Because as a one person show you can now create a multimillion dollar business fairly easily with infrastructure infrastructure that amazon setup. Um, so the opportunity is tremendous. There's never really been a better time to be a e commerce seller. Um, there's more and more people doing it, but there's also more and more opportunity and everything moves that way. You have, you know, aggregators or investors similar to boosted commerce who are looking for ways to roll this up and are paying a nice multiple to be able to get things where there is a product market fit already. Um, and from the cellar perspective, you know, there's, there's certainly sellers who love starting new things, um, and don't want to deal with the asshole of scaling it to the next level or don't know how or just plug all their money back into working capital once you've kind of reached that level, now there's a tremendous payday on the back end, right? So, um, yes, there is a decent fail rate, uh, that you just mentioned amy, but there's also a tremendous opportunity and there's not really many other places where you can, you know, work some people as little as 3 to 4 hours a week, build up a million plus dollars business really just kind of finding a nice product market fit, bringing into amazon and getting your goods into FBI warehouse and then a little bit of marketing and you're right there. Um it's fascinating what what amazon has been able to do another marketplace have been able to do for, for mom and pop businesses. [00:17:19] spk_1: Yeah, I love that perspective. It is still a great opportunity and when you compare it to what you would have to do traditionally to grow business of that size in that time frame and the team that you would need it is there's a big difference there. So I would agree on that side of the opportunity definitely. So let's talk a little bit about business value. Everyone wants to know, [00:17:48] spk_0: well, [00:17:49] spk_1: okay for example, you know, we run a lot of our expenses through our amazon business. It's kind of nice, right? We can we can write off like our some of our house stuff because [00:18:00] spk_0: our office is in the house, [00:18:01] spk_1: we can write off our truck payment because we use that to move stuff around that kind of stuff. Um So a lot of a lot of people do that, they'll run their personal expenses through their business, that kind of thing. Um Business expenses of course. But either way let's talk about how a business is value for an amazon type of business is calculated because not all those expenses Are taken out of that margin that you talked about and you talked about a 20% margin. Are we talking about before [00:18:34] spk_0: advertising? [00:18:36] spk_1: After advertising? Is that what you're looking for them to net? Um So can we talk a little bit about how business is valued and what sellers should be looking for when they're looking at their [00:18:46] spk_0: books with their [00:18:48] spk_1: accountant and what they should be thinking about. [00:18:51] spk_0: Yeah. So the first thing I would say um is at boosted commerce. We have expertise and digging into any type of financial set we get right. So we can we can take your numbers directly off amazon and use those to kind of create our own P. N. L. We can even take just give us your data and we'll figure out how to put it together. Which is great. That being said not only from a selling perspective but just general business practices having your numbers in working order makes everything so much easier. Both from an analytics perspective but also just managing your business, right? So it's worthwhile to get that set up when we think about it. We're looking at what we call either SD sellers, discretionary earnings or as it gets bigger it's able to and both of those are essentially a proxy for cash flow or profit. Right. How much money is your business making on any given time period Now? What we're looking is for recurring profit. So as you're talking about amy in terms of, uh, office space or, you know, you're putting your own car through it because it's a business expense where you're traveling all over. Those are what we call add back. So if you look at your number and then there's some some costs that as a boosted commerce, another aggregator, another buyer, those aren't going to be continued costs. You'll get credit added those back to your numbers so that will actually make your profit a little bit higher than your actual profit. Because what we care about his future cash flows, right? We're looking at what can we make on this business and we don't have a car. We already have our office. We even sometimes have, you know, if you're looking at a Jungle Scout or some, some costs like that, which aren't as large, but we can, we can add those back to give you credit because we're looking at what we're going to be doing. So when I say 20% margins, I'm talking about that adjusted sellers, discretionary earnings or to, Which is for every dollar that you make in revenue, you're getting 20 cents of quote, unquote cash flow. [00:20:50] spk_1: Got it. That makes sense. So, um, in terms of selling though, and in terms of seller fees, I know there are many different types of fires. We have aggregators, we have individual buyers, You can post your business on business websites like empire flippers. There's many different types of businesses out there, um, and types of buyers out there. So in terms of that, like, how would you compare boosted if we can explain a little bit about what what type of buyer boost it is and kind of compare that to some of the other types of buyers out there and then talk about how much it [00:21:33] spk_0: costs to [00:21:34] spk_1: sell. There's obviously going to be some fees or something like that associated with that sale. Um, can we talk about that? [00:21:42] spk_0: Sure. So the industry is changing at a dramatic, dramatic pace, right from a buyer's perspective, It kind of reminds me of, of private equity back in the 1980s and this is getting off of, of Amazon speak. But back then, the industry was incredibly nascent as it is here, but there's still a decent amount of infrastructure in place. So it's, it's just evolving at a rapid rapid pace, which is only made more rapid by what's happened with Covid over last year. Um, so from that perspective, you know, you you typically amazon well, it wasn't really wasn't set up for for buying and selling companies, but it's kind of evolved from the aspect of people like boosted commerce coming in. So you have multiple different aggregators who have raised a decent amount of money to come in and buy up businesses and add scale. And when I say that, right, what we always tell our sellers is okay. They say, shoot, I wish I would have had additional 15 hours this week to do X, Y Z. Well, we have a team of operators behind us who once we buy the business, we can actually give that additional TLC to your business to help scale it, right? Not only that the time, but also expertise, because we have, uh, you know, the boosted brain is what we call it. So we have a team that's, it's kind of a corporate and we have a supply chain team and we have an inventory management team and with the marketing team that all allows us to spread it across multiple different businesses, whereas one business, it's harder to have all that infrastructure in place. So that's kind of where the aggregator model comes from, boost of commerce. We like to think of ourselves more more more than just an aggregator, right? We're trying to be where the consumer is. So how do we take that in scale? That's a different question. Um so that that's kind of one set of buyers and typically those buyers can pay a little bit more than others who are buying on a one off basis because they can drive more value out of your business, right? Because of that team they have, there's additional growth that they have, there's additional letters potentially even moving it off amazon or into europe because we have expertise there etcetera. Um you have individual buyers right, which have been around for a while who can go by businesses, you know, and are kind of just continuing on with the mom and pop way who, well we'll take your business and continue to run in a similar manner, but are looking again for that product market fit. So they don't have to start something from scratch and get through that point. You were talking about earlier Amy, where a certain percentage of businesses aren't going to make it to a million dollars. I know the numbers you were thrown out earlier. The number we see if there's Somewhere between 40 and 50 businesses on Amazon doing over a million dollars of revenue, right? So it's still a decent size, but it's not that easy to get to that side. So some people are looking to buy their way in even as an individual. Um, and then what you also have seen is amazon basis continue to get larger. Some of the private equity type investors are also coming into the space, um, in particular for, for larger ones. Right? So we're not talking about million dollars of revenue. We're talking about eight or even nine figures of revenue, $1000 million where amazon has attracted a lot of attention recently, given some of the success and given how, You know how well the business has done. So, those are kind of the three main buyers we're seeing, you know, there's different aspects to each and there's different benefits in different Issues with each. Um, you know, what we're trying to do is build up a portfolio of 100 plus 200 plus brands, become the Johnson and Johnson or Procter and gamble of the 21st century have an opportunity to have all these brands and and benefit from the boosted brain while maintaining the integrity of the brands themselves and hopefully helping them scale. Thanks for tuning in to part One of this episode, join us every Tuesday at one PM, pacific standard time for live Q. And a. And bonus content after the recording at cellar round table dot com, sponsored by the ultimate software tool for amazon sales and growth seller S. C. O dot com and Amazing at home dot com.